Getting to know held orders
Market orders that need instantaneous execution so they can be filled immediately are called held orders. These trades will most likely expect executions at the best offers and bids for buy and sell orders, respectively. We mentioned market orders because these are some of the most common examples of held orders. And since you are already here, know that the opposite of held orders is a not held order. They offer brokers the decision when it comes to time and price to get a better fill opportunity for a customer.
Tell me more about held orders.
Held orders give traders minimal discretion when looking for a price because there is not enough time to fill. In a typical scenario, held orders must match the best or lowest offer for an instantaneous transaction. Let us say that the bid-ask market spread for Company A is $150.50 / $150.70. A trader gets a held order to buy at 100 shares. Now they would need to place a buy order at $150.70 to be executed immediately if the market condition is a typical one. Investors use held orders when they need to change their exposure to a stock, and they want their orders to be executed right then and there.
Practical times to use a held order
Let us cites some of the situations when it is ideal to use held orders. First, let us talk about trading breakouts. If there is a market breakout and the trader wants to enter immediately into a specific stock, he can use held orders. If he does this, he does not have to worry about slippage costs. Slippages happen when the market makers change the spread right after receiving the market order for their benefit. Traders would be willing to pay for slippage in a fast-moving market for the sake of immediate fill.
Next, we can use held orders when we close error positions. Traders do this if they want to lessen their downside risks. For instance, you accidentally bought a stock that you did not like. You can use held orders if you want to change the position before purchasing the suitable security.
Finally, held orders are also ideal for hedging. Hedge orders should be filled fast as soon as the initial position gets established. It should be this way so that the hedging instrument's price does not change. We say it should not change because if it does, it might not be a viable hedge after all.
Let us recap the essential things.
We learned that brokers receive held orders to execute and fill them
immediately. Market orders are the most common examples. A trader benefits from
a held order because they can be sure that the total size of their order will
be executed immediately with no delay. They can be sure regardless if it is a
buy or sell order. In contrast to held orders, not held orders give brokers
more discretion to find a better price at their own pace. However, these
attempts might not be that successful. Finally, let us remind you that it will
be best to avoid held orders if the stocks are not liquid enough or are
illiquid altogether.
